Trading Nation

Don't chase Chinese stocks at these levels, traders warn as Alibaba hits all-time high

VIDEO3:5603:56
Alibaba hits all-time high. Traders talk the state of Chinese stocks

Chinese stocks charged higher this week.

As of Thursday, the Shanghai Composite was up nearly 9.5% week to date while the Shenzhen Composite was up over 10.5%, adding to a recovery rally in China's stock market that has been building since late March.

The recent gains have largely been due to improving economic conditions in China. But some attributed this week's sharp move to a front-page editorial published over the weekend in a state-owned financial news outlet that encouraged Chinese investors to participate in bringing about a "healthy bull market."

Shares of Alibaba, China's answer to Amazon, have added to the strength. The stock hit an all-time high of $268 on Thursday after Needham initiated coverage of the stock with a buy rating, saying it has a "strong moat in [the] e-commerce ecosystem."

With so much good news baked in, one market watcher advised investors not to chase the China rally.

"The problem is it's rallied so much [in] just over a week," Matt Maley, chief market strategist at Miller Tabak, told CNBC's "Trading Nation" on Thursday, referring specifically to the Shanghai index.

"It's the most overbought it's been since 2014, even more overbought than its all-time high in 2016," Maley said. Chart analysts typically interpret overbought conditions as signs that the underlying stock or index could be prime for a pullback.

"No market moves in a straight line, and I think you'll get the chance to buy both Alibaba and Chinese stocks at lower levels over the next couple weeks," Maley said.

He added that while Alibaba looks overbought on a near-term basis, its chart suggests it could continue its rise over the long term.

"The stock had formed what's called an ascending wedge. That's actually usually a bearish pattern. When you break below it, it sends up a big red flag," Maley said. "But this time, it's broken above it, and not only above it, but well above it. And so, this should bode well, I think, for the longer-term basis, although I wouldn't really want to chase it in the near term. Let it come to you."

Gina Sanchez, founder and CEO of Chantico Global, said "part of the outlook for Alibaba also happens to be their size."

"They clearly have the largest ad revenues in the market," she said in the same "Trading Nation" interview. "But because of that size, it also means that slowdowns will ... be very large."

And the current slowdown could hit Alibaba hard, Sanchez warned, saying ad revenue growth could slow to 6.5% versus its pre-pandemic levels of close to 20%. 

"That is a pretty big slowdown, and of the major players — between them, Tencent and Baidu — they are likely going to see probably the largest slowdown as a result," she warned. "So, I'm not sure that this momentum matches the actual outlook. There's going to be significant slowing and that's not priced in at all."

Alibaba shares closed 1.5% higher Thursday on the New York Stock Exchange, at $261.58. Needham's $275 price target represents a 5% increase from that level.

Disclaimer